Chile’s Lithium Reserves: The Nationalization-Privatization Battle

Chile has embraced extractive industries as a tool for sustained economic growth, but this relationship does not come without controversy. At the beginning of this month, only one week after the government had announced the winner of its lithium contract, the concession had been scrapped and Sub-Secretary of Mining Pablo Wagner had resigned.

Chile is the world’s biggest lithium producer, generating 30 percent of the world’s profits on the sale of raw lithium and sitting on an estimated 23 percent of global lithium reserves—second only to neighboring Bolivia.

The latest controversy began on September 24 when a 20-year Contrato Especial de Operación de Litio (Special Lithium Operation Contract—CEOL) was awarded to Chilean company Sociedad Química y Minera de Chile S.A. (SQM). SQM was one of three companies whose bids to explore Chile’s lithium potential had been accepted by the government.

SQM currently produces 24 percent of the world’s lithium and is only one of two lithium producers operating in Chile. The concession, which was sold to SQM for around $40.6 million, would have allowed the company to begin mining a further 100,000 tons of lithium from the government-owned Salar salt flats in the northern Atacama Desert.

The contract was revoked a week later, however, after rival bidder Li Energy Spa revealed that SQM had not met the tender’s requirements since the company is currently being sued by the state. Pablo Wagner, who claimed that SQM’s legal battles were with the Treasury and thus still applicable to their bid, resigned a day after the concession was revoked. His resignation was supposedly at the request of President Sebastián Piñera.

The tender was controversial for other reasons. In 1973 lithium was declared a “strategic resource” and thus not up for concession according to the Mining Code. The dictatorship of Augusto Pinochet (1973-1990) thus placed a ban on all lithium concessions, essentially claiming government ownership of lithium reserves.

The Piñera administration argues that the CEOL is similar to the Contrato Especial de Operación Petrolera (Special Petroleum Operation Contract—CEOP) that was awarded during the government of former President Michelle Bachelet (2006-2010).

Opposition politicians and lawyers do not buy such an explanation and consider the move entirely unconstitutional. “There are major differences between the situation with petroleum under Bachelet and with lithium now,” lawyer Patricio Zapata told the Santiago Times.

“First, Chile has a state-run petroleum company whereas there is none in the lithium market. Second, the petroleum contract permitted certain activities in predetermined areas while the lithium agreement includes the entire country. Lastly, the petroleum agreement was a joint venture. The lithium agreement, on the other hand, will only pay a royalty of 7 percent, which means that the state will barely be involved.”

Another point of contention concerns the use of an executive decree to open up bidding instead of consulting with Congress, which has resulted in some of its members complaining of sidestepping congressional authority.

Further, critics of the CEOL also condemned the ministry for awarding the concession to SQM, whose chairman is Pinochet’s former son-in-law and whose chief operating officer is the brother of Mining Minister Hernan de Solminihac.

Following year-long protests over plans to build five hydroelectric dams in the south of Chile, some Chileans worry that lithium will soon be added to the list of Chilean natural resources where the profits are pocketed by foreign companies, leaving little left for Chile’s people except high utility costs and environmental damage.

“Mining is one of the key elements that Chile has for financing social programs, which is why we are concerned over how governments have acted since the return to democracy in 1990, renouncing our sovereignty in favor of multinational corporations that leave next to nothing in the state’s coffers,” said Jedry Velis, general secretary of the Confederación de Trabajadores del Cobre (Confederation of Copper Workers—CTC).

Through the CEOLs, the government plans to collect $350 million per project through a 7 percent sales royalty. But some believe the country’s lithium should be exploited entirely by a state-owned company, as is the case with leading copper producer Codelco.

Many, like Senator Isabel Allende, daughter of former President Salvador Allende (1970-1973), argue that greater investment in the development of the country would be possible if resources like copper and lithium were controlled more by the state.

“We’re calling on the government to withdraw its call for bids and instead craft a policy that gives added value and contributes to Chile’s development,” Allende said before the concession had been awarded.

Jaime Alee, director of the Center of Lithium Innovation at the University of Chile, observes that the attention surrounding the contracts was “political.” Currently the lithium industry in Chile is economically negligible, he says, valuing it at less than $400 million a year.

But the trend lines may change: a 2011study by TRU Group Inc. estimated that global demand for lithium would double by 2020. The countries most heavily investing in developing hybrid and electric cars (i.e., Japan, Germany and Finland) do not have their own lithium reserves.

What happens next is widely up for debate. A few politicians and scientists, including Senator Guido Girardiare, are attempting to advance the dialogue. Girardi told the Santiago Times, “The world market for raw lithium […] makes up US$1 billion. The market for batteries and lithium-related products will reach US$200. The question is: which market do we want Chile to be in?”